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Monday, March 28, 2011

Challenge Project Summary for March 28, 2011: Expansion

Previous $500 Challenge Project Balances:

"The Three Sisters":

Investing "Sister" Balance: $1,133.66
Trading "Sister" Balance: $2,269.36
Side-pocket Savings "Sister" Balance: $700.00
Total Challenge Project Funds: $4,103.02

Introduction:
The original video explanation of the Challenge Project that began with $500, is to be found here. The Challenge Project is basically a demonstration of a model that anyone could at least follow along with on a weekly basis. It is my attempt without cost, to help out the 'little guy' when it comes to investing and trading by providing an example, a 'model' as it were ... as run by myself as a professional trader with real money, in accounts that I own; following my own three sisters portfolio management system; albeit modified a bit to operate with low funds. From time to time, I provide snapshots of the broker statements.

Rule No. 2 of the Challenge Project states that each month, we can divvy up $100.00 as we wish between the various challenge project accounts. We split up Rule No. 2, into weekly segments; or $25.00 a week. As I mentioned on August 10th, 2010 I have liquidated all of the other personal accounts that I've discussed on this blog for the last 4 years, and to emphasize the strength of these principles? I will demonstrating my success, again, this time it will be live, with the 'Challenge Project', full time.

For this week, the $25.00 weekly deposit is being transferred to the Challenge Project SAVINGS SIDE-POCKET Account.

Ok. I have mentioned for some time that I want to 'expand' the Challenge Project savings side-pocket 'sister' account.

How?

Well, first let's review the original explanation of this portion of my 'book'.

"The savings account is split into three purposes, and used for three separate reasons, and by different percentages at different stages in the accounts growth. [This statement, by the way, is critical to understand, as today's entry will explain ...]
  • Drawdown Kill Switch Fund
  • Base Savings
  • Emergency Savings
If you are not familiar with my outline of money management principles, again, you can review that information for free. It will explain what I mean by both a “Drawdown Kill Switch” (Some call this the 'ruin level' of an account, that is a percentage of the account capital that the trader does not want to risk any more capital, and stops trading), and why I have a fund dedicated to supplementing an account, once the drawdown kill switch is tripped. To summarize briefly, if the trading account or investing account were ever to reach this “kill switch” level in terms of drawdown? Then a percentage of the savings account could be used to supplement the drawdown that the other account experienced.

Honestly though, that is only used in the beginning. I have not used my own personal drawdown killswitch fund in years. But it's still there, if need be.

In addition, everyone should have a base savings. In better times, the entire savings account would be earning interest, and I will soon talk about how the accounts 'feed' one another. Hopefully, a way can be found out of the current liquidity trap that has occurred in recent years, and we can once again return to days of actually earning interest on our savings. What a radical thought eh? It should also be noted that I do keep physical metals, actual bullion as part of my base savings. But bullion cannot put food on the table.


Regardless, a percentage of the savings accounts are also used for emergency savings. I don't care what someone's level of wealth is, everyone needs to maintain an emergency savings fund. If you have $5,000,000.00, and you develop a critical, debilitating illness? Despite having good health insurance, you had best hope that you have access to liquid funds. There are any number of emergencies that can arise in our lives. I know, I've watched it happen. I've watched patients on cancer regiments have their retirement savings eaten up, despite having health insurance.
And yes, I keep this function as a part of my “three sisters” methodology, although at first it may not seem related to trading or investing. Because when I generate money in the markets, having these accounts as part of my portfolio strategy reminds me that no matter what sort of success I'm enjoying? Life is a precious, fragile thing, and I should do my best to prepare for unforeseen events."



So let's talk about the expansion of those ideas and concepts for the 'savings-sister' account as well as what I mean when I wrote: " It should also be noted that I do keep physical metals, actual bullion as part of my base savings." as well as "The savings account is split into three purposes, and used for three separate reasons, and by different percentages at different stages in the accounts growth."

Because we have arrived at a time period where we can begin to expand the 'savings side-pocket account'.

How? By what means?

Well, after noting the balances below, you will see that I have created categories within the "Base Savings" 'third' of this account, in a similar manner that I categorize and reserve cash for the dividend investing 'sister' account.

Let's discuss those categories now.

Savings "Maneuvering Capital"
This is something I've always believed in. Maneuverability in cash, is a key principle in any venture. You may have the skills to determine great entry points. You may be able to read any given markets sentiment and instantly 'place' the psychology of the mob.

But without cash? Without liquidity? You're dead in the water.

Thus ... this category, which will also be earning just regular savings interest, adds maneuverability to both the savings side-pocket sister as a whole, as well as the book overall.

CD Ladder Creation
Again, this is a portion of my savings that I've always believed in and discussed in the past. So there is nothing new in my proposing CD Ladders. If you would like an explanation of CD ladders, you can find one here, with a "CD Calculator" here ...

The question arises ... "How do we actually create the CD ladder?" Well ... that's a 'horse of another color' so to speak.

Remember .... I'm here for the low-funded, and showing them alternate means of getting started, since they do not have $200,000.00 to manage. I feel this is especially important, as we have just emerged from one of the worst recessions anyone currently alive remembers. That is, after all, the entire point of the Challenge Project. To try to assist those who are starting out as I did, with next to nothing by sharing and journaling my thoughts and experiences.

For the online savings institution that I am using, you can place as little as $25.00 in a CD. So I am not limited, as some institutions limit their customers, to saving $100,000 before I can initiate a CD Ladder.

But at the same time, $25.00 is just too small to begin branching out in a full form CD Ladder, with 6 different 'rungs' on the ladder.

One method, is not to create the ladder in one moment, and splitting $50,000 across different maturities, as is often done.

What is the goal with a CD Ladder exactly? To have a 'ladder' of CD's at different maturities .... correct?

So the low funded have to consider the option of savings up $100.00, and place that towards a 6 month CD that will mature. Then, build another 'rung' by saving up another $100.00 and wait until the first 6 month CD is halfway through one of it's maturities, and instigate another 6 month CD, and slowly build the complete ladder in this manner by building the rungs in an individual manner.

This is probably the route the Challenge Project book will have to take.

It should also be noted that I keep the CD ladder portion and the maneuvering capital completely separate and weighted so that there is more maneuvering capital than there is in the CD ladder. Why?

Well, this goes back to the principles behind maneuvering capital and liquidity. When you have a CD Ladder, you have higher interest and better liquidity than if it was locked into one CD, but still less liquidity than just having simple, straight cash. And with less liquidity, comes less maneuverability and ability to adapt. Which is 'risk'. Therefore, I 'weight' the CD Ladder section as less than the cash maneuverability. At least for now.

Now ... the question may arise ... "Dan ... why didn't you create a CD ladder immediately when creating this Challenge project? Why wait until now?"

Good question.

It's a matter of flexibility.

I could have begun this Challenge Project by simply saving all $500 and constructing a CD Ladder. And in the beginning I may have had a better rate of return. But by constructing the Challenge Project as I have, I now possess....
  1. Better versatility to invest with different instruments as time progresses Thus, the Challenge Project overall has great flexibility in it's construction. As time progresses, it becomes easier to trade, as well as invest, as well as save. And with that diversification, it becomes easier for the 'three sisters' to re-distribute their individual gains to help the account grow more quickly.
  2. As well, come on ... who wants to read a journal about a guy sticking money in a savings account for 6 months. This is an investing and trading journal and 'diary' so to speak.

Side-Pocket
'In enters' the 'side-pocket' accounts. Stamps. Coins. Artwork. Assets for which there is a market, but no exchange.

Despite my rants during 2008 due to the lack of a regulated CDO market, I do not feel that every single asset in the world needs to be placed on a regulated exchange. That'd be silly. If an asset is going to be used, as CDO's were, and purchased by financial institutions ... but kept off of their balance sheets ... and those same assets become leveraged, and a certain level of liquidity is attained by institutions trading those assets in a leveraged manner ... yes ... I would like to see a regulated exchange.

But let's be reasonable ... there doesn't need to be a "postal stamps exchange" to properly value collectible stamps.

Now the next question, is a matter of liquidity. Do we consider something like silver a 'liquid' investment, or do we consider it an 'illiquid' investment?

My answer is: Yes.

Do I consider something like silver as a liquid investment at the moment?

Yes.

Can it become illiquid?

Yes.

The market liquidity that now exists for silver can disappear, and disappear quickly. So the risk in my mind is not as much a question of what price you can sell it for. It's a question of can you sell it if necessary at a price you would prefer?

Therefore, the question in my mind for collectibles such as art, stamps, or silver bullion is not really one of liquidity and how easily can I mark, or track the price. It's a matter of how heavily do I weight my 'sidepocket' holdings on an asset that can quickly become illiquid.

Thus, inside the 'base savings' category of this portion of my portfolio, I try to make sure that the weight of any such purchases is always under 3 % of the base savings category. Which would mean that if I can keep to the weighting below that level for the base savings category, then any future side-pocket purchases would be under 0.68 % of the savings side pocket account overall, and under 0.1206 % of the entire book.


Hedging Account
Now this category? This is a category that is completely new and an optimization to my 'three sisters' approach, and relates to my "Week in Review" entry that I discussed running one's family balance sheet like a corporation. With this category, I can look at hedging out gasoline costs in the spring, or even currency hedging with my frequent trips to Mexico, or hedge out my exposure to any U.S. Dollar weakness.

I hope this helps explain the categories that you will now see listed for the savings side-pocket 'sister' account.

Here are the new balances for each of the Challenge Project accounts ...

Challenge Project Balances After Rule No. 2 Deposit:

Goals for Each Account By the Time I Trade Challenge Project Full Time
  • Investing Account: $580.00 in cash past equity positions
  • Trading Account: $2,600.00
  • Savings Side-Pocket Account: $900.00

Investing Account Balance: $1,150.76
(YTD the account is +12.78 % YTD Return is about -1.674 % )

  • 6.2685 shares of KO ( DRIP is on for 4.2685 shares - Yield is +2.8826 % )
  • 5.2147 shares of JNJ ( DRIP is on for 3.2147 shares - Yield is +3.6623 % )
  • 6 shares of GIS ( DRIP is not on for any shares - Yield is +3.0685 % )
  • Cash $213.24
-$134.16 of this cash I reserve for 'maneuvering' capital ( 11.66 %)
-$ 15.00 of this cash I reserve to D.C.A. KO ( 1.303 % )
-$ 41.08 of this cash I reserve to D.C.A. JNJ ( 3.57 % )
-$ 17.00 of this cash I reserve to D.C.A. GIS ( 1.47 % )
-This leaves $ 3.00 cash available for a new purchase ( 0.2607 % )
-This leaves $ 3.00 cash available for a second new purchase ( 0.2607 % )
  • Additional $181.25 ( 15.75 % ) available from slush fund, up to $1,332.01

Trading "Sister" Account: $2,269.36
( YTD cash equity up 2.253 % Return on Capital is 0 % )
  • 2% risk tolerance gives us $45.38 'at risk' levels
  • 3% risk tolerance gives us $68.08 'at risk' levels
  • Additional $181.25 ( 7.987 % ) available from draw-down / slush fund, to $2,450.61

Savings Side-Pocket Balance: $725.00
(YTD cash equity up about 16 % Return on Capital is 0 %)
  • $181.25 for a Slush fund / Draw-down Kill Switch fund
  • $362.50 for a Base Savings
-$302.50 of this cash I reserve for savings 'maneuvering' capital ( 83.45 %)
-$ 50.00 of this cash I reserve for CD Ladder creation ( 13.79 % )
-$ 5.00 of this cash I reserve for the first side-pocket purchase ( 1.38 %)
-$ 5.00 of this cash I reserve for the second side-pocket
purchase ( 1.38 %)
-$ 0.00 of this cash I reserve for the hedging account ( 0.0 %)
  • $181.25 for Emergency Savings

- As described in previous entries, all deposits past $675.00 will be towards an interest bearing account, although it separate accounts will still be treated as one 'sister' portion of the book.


Total $500 Challenge Project Balance: $4,145.12 ( YTD the account is +7.256 % YTD Return is about -0.4704 % )

* * *

Note: The above statements should not be construed as an investment or trading recommendation. Airelon's Investing and Trading Journal is a blog that allows subscribers to look 'over my shoulder' as it were, for my own personal specific trading and investing ideas and thoughts for the next week. But they are only thoughts as of the moment of publication, and are subject to change.. Any trades or investments that I discuss within this blog are simply my own thoughts regarding my own investing and trading outlook. Remember that entering any market is an individual decision. There is no guarantee that I will enter, or have entered any of the trading or investing ideas that I discuss in this blog; as larger accounts may require a different strategy as the ones presented here. This blog simply contains my trading and investing thoughts for the next week. I, the author do not grant this work for wide distribution beyond any single individual subscriber as this publication is protected by U.S. And International Copyright laws. All rights reserved. No license is granted to the user except for the user's personal use. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted or otherwise reproduced, stored, disseminated, transferred, or used, in any form or by any means except as permitted under the original subscription agreement or with prior written permission. I personally only enter any market after watching and reading the tape and I trade using money management principles. The losses in trading can be very real, and depending on the investment vehicle and market, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 15 years of experience in trading and investing in these markets. Airelon's Challenge Chronicles are demo accounts,with all of the inherent problems therein, which are used within this blog in an attempt to track the results of my own thought processes., and is run as a model. Traders who should make their own decisions based off their own research, due diligence, and tolerance for risk. Any pictures used within this blog are believed to be public domain. Any charts that displayed using the ThinkorSwim platform, or any other charting software are believed to be public domain. Any other pictures were obtained through Wikipedia's public domain policy. As a reminder, any trades discussed for "Airelon's Challenge Chronicles" would only be 'day trades' according to the parameters discussed for Airelon's Challenge Chronicles, at this stage of the game in order to escape the risk of over-leveraged gap opens in the commodity futures markets. As a 'trading sister' would have grown to the $30,000 level, I would have graduated the account into 'swing trading'. In addition, it is understood that readers have read my YouTube methodology series. It is also understood that the writer of this blog has repeatedly warned against the dangers of shadowing any other traders thoughts. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk

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